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After more than two months of extensive discussions, the three leading Chinese telecom service providers have finally reached an agreement to establish the country’s first joint network infrastructure company. The joint venture, to be called China Communications Facilities Services Corporation Limited, will be involved in building telecom towers, base stations and other transmission assets for the telecom industry. Reflecting on the positives of such a JV, China’s Ministry of Industry and Information Technology had earlier stated that such a move could help protect the environment and conserve resources, in addition to lowering network construction costs for the telecom industry.

The JV is expected to help the carriers – China Mobile, China Unicom and China Telecom – in avoiding overlapping investments and duplication of work related to building network infrastructure in the country, especially with respect to expansion of the 4G network in the near term. This is likely to help improve resource utilization and ease site selection bottlenecks, ultimately leading to a reduction in the carriers’ capital expenditures as well as operating expenses. We also expect these cost savings to trickle down to users in the form of lower monthly tariffs in the medium to long term.

The JV will have registered capital of RMB 10 billion ($1.61 billion), with wireless market leader China Mobile holding 40% of the shares and China Unicom and China Telecom holding 30.1% and 29.9% shares, respectively. The new company will focus on construction, maintenance and operation of telecom towers, base stations as well as other transmission requirements such as power supply and interior distribution systems. Going forward, the carriers also intend to inject certain telecom assets into the new company but they have yet to reach an agreement on the specifics of this issue. ((ref:1))

Smaller Carriers Likely To Benefit Most

We believe that smaller carriers China Unicom and China Telecom are likely to be the biggest beneficiaries of this JV as they would get a chance to improve their network coverage (by sharing China Mobile’s expansive network) without the exorbitant capital costs involved. With over 787 million subscribers, China Mobile currently holds a dominant share of 62.4% in the Chinese wireless market and is followed by China Unicom and China Telecom with 23.2% and 14.4%, respectively.

For expanding 4G coverage and improving competitiveness in the wireless space, China Unicom and China Telecom were recently awarded 4G licenses on the FDD-LTE standard, which is different from the TD-LTE 4G standard used by China Mobile. Considering the difference in technology standards, the smaller carriers will have to spend on developing FDD-LTE 4G infrastructure in the near term on their own and they are unlikely to gain significantly from China Mobile’s network in this regard. However, they will be able to utilize the market leader’s telecom infrastructure for providing interoperability among different network standards to their subscribers. With the availability of low-cost five-mode handsets (providing global support for TD-LTE 4G, FDD-LTE 4G, TD-SCDMA 3G, WCDMA 3G , and GSM 2G) improving in the country, we expect carriers to take advantage of network interoperability to improve resource utilization efficiency, reduce operating costs and protect gross margins in the near term.

A Boost For Mobile Virtual Network Operators

Mobile Virtual Network Operators, or MVNOs, are companies which provide telecommunication services to customers even though they do not own any network infrastructure of their own. These companies generally lease out network infrastructure from existing players or can also operate through the internet to provide their services. The MIIT issued telecom licenses to 19 such companies in December 2013 and January 2014 to increase competition in China’s wireless market.

Chinese MVNOs currently have to enter into agreements with the established carriers individually to rent their network infrastructure, which is one of the likely reasons for their sluggish start. We expect the joint infrastructure company to provide a stepping stone to MVNOs to gain access to the massive Chinese wireless market by making it easier to lease networks. However, it is important to understand that even if these companies get easier access to network infrastructure, they still have their work cut out in terms of gaining subscribers, considering that the MVNO business is still in early stages of development in China, and their competitors are some of the largest telecom operators in the world.